Santa Stocks: Some Naughty, Some Nice

Even though many dread the appearance of Christmas sale signs, especially before Columbus Day, the last quarter of the year can offer some good market opportunities. One industry group that I focus on at this time of year is the Specialty Retail sector. I use a broad description of this group for the holiday season, and while a majority of the stocks look nice (good charts), there are a few naughty ones (with lousy charts), too. First, let’s look at a long-term chart of the Specialty Retail sector.

Figure 1

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This weekly chart goes back to the latter part of 2001 and is updated through October 1, 2010. The specialty retailers bottomed on September 15, 2001 and rallied impressively for the rest of the year, not turning lower until the second quarter of 2002. From the September lows to the week of Christmas (identified by a vertical dotted line), the group was up over 56%, but the data from back then is a bit sketchy. During the last quarter of 2002 (see circle), the economy was still weak, and even though the group was in a general downtrend, there was a 20% bounce in the sector between October and November. In 2003, stocks had formed a double bottom in the first quarter and were in a solid uptrend. Stocks consolidated during the summer, forming a low on August 9, 2003 at 227, and by the end of November, they hit a high of 330 (up 45%). Things were different in 2004 as the group had consolidated for most of the year, reaching a low on August 4, 2004 just below 300. The impulsive rally from these lows took the index to a high of 372 by the latter part of November (up 24%). The specialty retailers maintained the series of higher lows in 2005, forming a low on August 22, 2005 and rallying into the end of the year. On a percentage basis, this was only a move of about 13%. The lows formed in 2005 were violated during the summer of 2006 before the group finally turned higher in early September and gained 20% by the end of the year.

During 2007 and 2008, signs of economic weakness and tightening by consumers were already evident as the specialty retailers violated the August lows in October. The trend had not improved much by the fall of 2008 as the group continued to form lower lows. Despite this, there was a 26% bounce between the weeks of November 15, 2008 and December 13, 2008.

The specialty retailers formed higher lows in March 2009, completing a bottom formation for what became a major new uptrend. After correcting into the July lows at 235 and holding the 38.2% support, the group accelerated to the upside. There was short period of consolidation in August with a low of 263 before the sector finished the year at 306. This was just a 15% gain, but for the year, the group was up over 36%.

Figure 2

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From the April highs at 371, the specialty retailers had quite a correction, but it held above the 50% retracement support from the March 2009 lows. The strong close above the 306 level (line 1) on September 20 confirmed the bottoming signals from the technical studies like the on-balance volume (OBV), which also moved through resistance, line 2. The 50% retracement level at 325.40 is now being challenged, and if the 61.8% level at 336 is surpassed, it will confirm a new uptrend. On a pullback from the recent highs, there is first support at 315 with good Fibonacci support currently in the 303-308 area.

NEXT: Specialty Retail Stocks to Watch

Figure 3

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For the Christmas shopping season, we must also include the online retailers after the success of Amazon.com (AMZN) and others. One online retailed that looks interesting is Blue Nile (NILE), which sells high-end jewelry and is a company my wife tells me I should be more familiar with. Technically, NILE peaked in October 2009 at $67.16 and appears to be forming a base in $40-$41 area. The decline retraced just a bit more than 50% of the rally from the March 2009 lows and held well above the 61.8% support. The weekly chart shows a declining wedge formation with the downtrend (line 1) at $48.80. There is further chart resistance at $52.25 with the 50% Fibonacci retracement resistance, calculated from the October 2009 highs, at $54.20.

One of my favorite indicators is the MACD-Histogram, which is derived from the MACD, developed by a brilliant analyst and old friend, Gerry Appel, in 1979. The MACD-His is the difference between the MACD and signal lines. On NILE, it has been forming a positive divergence, as indicated by line 3. A higher weekly close will turn the MACD-His positive. Though it may be tough to make a strong case for surging sales of high-end jewelry, an added positive is that over 25% of the float (shares outstanding) is on the short side. The stock’s average volume is 275,000, so limit orders and stops are a must. Weekly pivot support is in the $42.80-$43.90 area, which should be a good buying zone, and on longs, I would use a stop under $40.

Figure 4

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Even though I have fond memories of many Barnes and Nobles (BKS) stores that I have visited, the market’s poor outlook for their business model is clearly reflected in their stock price as the chart looks ugly, if not naughty. The primary weekly downtrend, line 1, goes back to the 2006 and 2007 highs, as BKS hit $48.41 in March of 2006. This downtrend is currently in the $30 area with the downtrend from 2008 (line 2) now at $27. In early June, BKS completed a triangle formation (lines 2 and 3) and dropped back to test the 2008 lows at $10.77, which are so far holding. The recent rally looks like a pause in the downtrend as there is stiff resistance in the $18-$20 area. The conservative downside targets from the triangle formation are in the $5-$7 range—ouch!

Figure 5

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Of course, who can think about the holidays without thinking about toys? Though Mattel (MAT) has an interesting chart and is very liquid, the large ownership by institutions makes it less attractive, in my opinion. One you may not have heard of is JAKKS Pacific Inc. (JAKK), which is a small cap that has a wide range of toys, toy licenses, and other consumer goods. After a March 2009 low just above $10, it bounced to $16.26 in October 2009 and then slightly exceeded these highs in May as it hit $16.74. This key resistance, line 2, has now been overcome (point a), and it appears that a significant base has been completed. The next resistance is in the $20 area with former support (now resistance—line 1) in the $26 area. There is first good support in the $16.30-$17.10 area with further support at $15-$15.60. A break below $13.00, line 3, would be negative. The weekly OBV moved through its two-year downtrend, line 5, early in 2010 and has formed higher highs and higher lows since. The OBV held the support going back to 2006-2007 (line 6) and retested the breakout level in June, point b. On a daily chart, JAKK looks a bit overextended and I would only play the long side on a pullback to the $16.25-$17.05 area. A close below $15 would be negative.

In the past, the specialty retailers and other “Santa stocks” have generally peaked from late November through the middle of December. This allows for some good trading opportunities over the next few months. In the next lesson, I will look at the 2000-pound gorillas in the room, like Amazon.com (AMZN) and Apple (AAPL), as well as some other lesser-known stocks that may have better profit potential. I will also be following up regularly in our Charts Traders Are Watching section for new developments in this group, as well as new “Santa stocks” to watch or trade.